I. Technical Field
The present invention generally relates to computerized systems and methods for analyzing financial data. More particularly, the invention relates to systems and methods for computing and manipulating migration and performance matrices in order to analyze risk and performance.
II. Background Information
In today's environment of increased competition and converging markets, financial institutions must manage investment risks and returns on an integrated basis to gain a business advantage. Many financial services institutions have grown beyond their traditional businesses and have developed diverse operations. Due to increasing complexity, interrelated risks, and volatile markets, understanding the value of businesses, individually or collectively, poses a significant challenge to financial institutions. In order to meet investor, rating agency, and regulatory expectations, financial institutions increasingly require business processes and computing tools that effectively and efficiently assist strategic and operational decision-making.
Financial institutions are addressing these challenges by developing Risk-Adjusted Performance Measurement (RAPM) and Economic Capital frameworks. RAPM and economic capital frameworks allow financial institutions to aggregate their risk exposures and measure performance across diverse products on a consistent basis. Financial institutions that use RAPM and economic capital frameworks may move beyond traditional accounting, regulatory, and rating agency methods of determining capital and performance data for a business.
Building on economic fundamentals and financial risk modeling, these frameworks allow financial institutions to relate risk with profitability. In doing so, management may deploy capital more efficiently, actively manage risks, gain a competitive advantage in the marketplace, and meet regulatory requirements. For example, by considering underlying risks (e.g., credit, market, operational, and insurance) and relationships of risks and products, companies can better estimate performance based on specific risk and diversification benefits of a company's operations.
RAPM and economic capital frameworks also provide benefits, such as allowing financial instructions to: analyze economic capital adequacy and usage; view economic/risk relationships in annual budgeting and strategic planning; allow for the efficient deployment of capital and resources; determine a business, product, and customer mix that yields an optimal return; drive an incentive compensation by linking performance and risk taken; enhance investor relations, regulatory, and rating agency discussions; and improve their ability to price transactions. Aligning decision-making across business processes within a financial institution is a key aspect of RAPM and economic capital frameworks. As a result, all involved parties, including enterprise management, business units, risk managers, and account managers act within a consistent framework. Decisions are based on a common understanding of the key decision criteria, which may cause a single decision to have a large impact on the overall performance of the financial institution. As a result, involved parties have much better information when making decisions.
Performance of a financial institution is measured based on the risk-adjusted performance measurement approach taken. As a result, under and over performance of a company may be easily identified. To adequately measure performance results, however, one needs to have further background on the reasons behind business decisions to understand why a specific performance was achieved. The RAPM results often do not provide decision makers with adequate details to make informed decisions. Instead, RAPM results deliver static figures that do not provide a sufficient view of business performance. Since decision makers prefer to understand the actions and events that drove the performance of the period under consideration, decision makers require more detailed information. Detailed information of the kind needed by decision makes may be provided by migration matrices.
Typically, migration matrices include detailed information on the actions and events that influenced RAPM results within a specific period. In a typical financial institution, credit risk is usually the most important risk type, followed by market risk and then operational risk. In particular, a focus of migration matrices is to provide an understanding of the credit risk of related businesses. Migration matrices deliver in depth information on contributions of the following actions and events within the period under consideration: changed credit risk assessment of existing customers; business with new customers; customers lost; business extended with existing customers; business reduced with existing customers; and changes due to changed currency exchange rates.
In current implementations of migration matrices, however, the above actions and events are measured without relating the available data to RAPM and economic capital frameworks. For example, rating agencies provide migration matrices on the likelihood that a business or investment, typically referred to by financial institutions as a rated entity, will change its current rating within a given timeframe. However, business units may separately provide information on retention rates and controlling units may further provide separately information on the effect of changed exchange rates for different measures. Accordingly, migration and performance matrices are needed that combine risk and performance data in one framework that is consistent with the overall RAPM and economic capital framework.
Furthermore, current software tools are typically not compatible or flexible enough to provide an overview of all of the data pertaining to entities in a financial institution's portfolio. For example, such solutions do not take into account measurements such as the inflows and outflows that occur during a measured time period, currency conversions, or acquisition performance. As a result, decision makers are limited in the data that is available to them when making key investment decisions.
In view of the foregoing, there is a need for improved systems and methods for creating migration and performance matrices that relate data from RAPM and economic capital frameworks. There is therefore a need for a consistent approach or computerized platform that allows a user to analyze migration and performance matrices and other data so that decision makers are presented with an overview of data that assists financial institution when making and monitoring investment decisions.